Question

The Italian eatery at the Student Union orders pre-made, frozen calzones from a gourmet food distributor. They cost $2.50 apiece. Ordering costs are $10 per order, and orders always take 4 days to arrive. The demand over a term (for which the eatery is open 100 days) averages 80 calzones a day, with a standard deviation of 20 calzones per day. Holding costs are 10% of the Eatery’s purchase price.

1. a) What is the economic order quantity for calzones?

2. b) if the management has specified that the risk of a stock out during a cycle is 15.87%? What is the Reorder point?

3. c) What is the annual holding costs and annual ordering costs if we use the EOQ?

d) The Eatery has decided to make calzones themselves. These are made periodically in large batches, and everything not used that day is frozen. The daily production rate, p, is 160 calzones. Assume that the holding cost, H, is now $.40/calzone per term and S, the setup cost, is $16 per run. All other parameters remain unchanged. What is the EPQ, and how often do we start a production cycle? How many days do we run production?

Answer 1

Economic Production Quantity refers to the number of unit the company should add to the inventory and the production is made to minimize the total inventory cost. It maintain a balance between setup costs and carrying costs.